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When a stock sells for 10 times its sales, it is in the bubble area.
Such ratings can be justified if the company is growing rapidly and doing so profitably. But even cloud stocks eventually settle on earth, either because they justify belief with growth. or fail and fall.
With a profit of 225% in 2020 (so far) SolarEdge Technologies (NASDAQ:SEDG) has entered the bubble area. It traded with a market cap of $ 15.8 billion on December 17th. Annual sales are expected to be $ 1.5 billion.
SolarEdge manufactures inverters along with associated parts and software. These convert the direct current generated by solar panels into the alternating current used in the power grid. Regardless of who makes the panels, these are essential to keep the performance useful.
With solar panels now delivering electricity for less than $ 1 per watt, analysts expect a boom. New technologies will further lower the price. The need to combat climate change will overcome objections to oil. A thumb will fall on oil prices and the energy transition will really begin.
Meanwhile, all of these panels require inverters. In realizing this simple fact, Wall Street treated SolarEdge and its rival. Enphase Energy (NASDAQ:ENPH), as was the case with oil stocks in 2012.
The advantage for SEDG Stock
When SolarEdge announced net earnings of $ 43.7 million ($ 1.21 per share) for the September quarter on Nov. 2, it beat analysts’ earnings expectations. However, the same analysts then looked at the revenue figure of $ 338 million. They multiplied it by four and called, “Where’s the growth?” The stock fell hard from $ 262 per share to about $ 213.
It’s run down but it’s back up due to items like this that define its products as Module Level Power Electronics (MLPE). SolarEdge shares 80% of the MLPE residential real estate market with Enphase.
The “unique selling point” for SolarEdge is intelligence. The inverters are “power management systems” that maximize the power generated by each panel. It tells homeowners that you can “drive your car in the sunshine”. It offers energy providers cloud-based software so that they can get electricity from homes rather than avoiding it as they did a few years ago.
On December 17th, shares were trading at $ 313. This justified the trust of my InvestorPlace colleague Luke Lango, who named SolarEdge a “long-term winner” in November. The Biden administration’s pledges to boost solar power have breathed new life into stocks like SolarEdge.
Benefit in the panel
Home solar power is cool, but you get the most profit in larger utility-scale products. SolarEdge is active in this market, but not easily.
Inverters are now being installed by panel manufacturers. Most of the panels are made in China. Tariffs can keep these products out of the US, but that doesn’t work in international markets.
It is these risks that our Chris Markoch, who names SolarEdge, overestimated at its current price. The company’s sales for 2020 will still be below 2019. The stocks are susceptible to withdrawal. He prefers investors to buy an ETF like that Invesco Solar ETF (NYSEARCA:TAN).
The bottom line
I’ve been promoting solar energy for a decade. It’s featured on the main page of my personal blog.
There are many ways to make money here. But the business is prone to fads. Are you talking about residential or utility-scale projects? Which panel technology is best? Where should it be done to make the most money? Do you go with the manufacturer or the installer? Is the money in the panel or in the sale of power?
The current fashion for the inverter stocks is just the latest fashion. Fashion is changing. You can speculate on SolarEdge which has outperformed the underlying market this year. Or you can invest in the underlying market.
I’m with Chris on this one. Exchange-traded funds such as TAN or iShares Global Clean Energy ETF (NYSEARCA:ICLN) are the right way.
At the time of publication, Dana Blankenhorn held positions (neither directly nor indirectly) in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today, and Tomorrow with Moore’s Law, essays on technology available from the Amazon Kindle Store. Follow him on Twitter @danablankenhorn.
The High-Valuation SolarEdge Stock post sheds light on the intricacies of Alt-Energy and was first published on InvestorPlace.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.